Wachovia's net profit falls 10%

Takes $1.3 billion write-down in what analyst calls a 'messy' quarter

By

JohnSpence

BOSTON (MarketWatch) -- Wachovia Corp.'s third-quarter earnings fell 10% as the bank booked a $1.3 billion write-down as a result of disruption in fixed-income markets, according to financial results reported Friday.

The Charlotte, N.C.-based bank and financial-services company
WB, -0.28%
said profit fell to $1.69 billion, or 89 cents a share, from $1.88 billion, or $1.17 a share, earned in the year-earlier third quarter. Excluding merger expenses, earnings were $1.71 billion, or 90 cents a share.

Total revenue rose to $7.35 billion from $7.04 billion.

Analysts polled by Thomson Financial had been expecting quarterly earnings of $1.03 a share on revenue of $8.02 billion, on average.

Quarterly results at other large banks, such as Citigroup Inc.
C, -0.34%
and Bank of America Corp.
BAC, -0.75%
have been hit by charges related to the credit crunch, raising fears that market turmoil may continue. The nation's largest financial companies are writing down the value of fixed-income assets that have been pressured by deterioration in the credit markets.

Wachovia blamed the lower earnings on disruption in capital markets, which resulted in $1.3 billion in valuation losses and reduced origination and distribution revenue. The $1.3 billion valuation losses were on structured products and leveraged finance warehouse loans and commitments, the company said.

"These conditions clearly had a disappointing impact on the results of market-oriented businesses, but the strength in our core banking and brokerage businesses continued to serve us very well," said Chief Executive Ken Thompson in a statement.

"While the impact of the market disruption was significant, it's worth noting that the majority of the lower market valuations in the third quarter largely arose from a repricing of risk in the marketplace and do not reflect deterioration in the underlying credit quality of the assets in our leveraged finance and commercial real-estate securitization businesses," he added.

Shares of Wachovia were off 2.6% at last check in afternoon trading.

Big jump in provision for credit losses

During the latest quarter, Wachovia said, provision for credit losses increased to $408 million from $108 million the previous year, reflecting turmoil in the credit markets.

Wachovia said the latest quarter also included a $249 million after-tax gain to correct previous results.

The quarterly results included the full impact of the acquisition of mortgage company Golden West, which closed on Oct. 1, but didn't include retail brokerage firm A.G. Edwards Inc., which Wachovia also acquired.

"It's clearly been a challenging environment and the disruption in the global fixed-income markets has dominated much of our focus in the quarter," said CEO Thompson during Friday's conference call with analysts.

"Unfortunately, the markets most affected by the disruption are those where we have some of our most developed businesses in our corporate and investment banks, specifically those with the leveraged finance, structured products and commercial real-estate securitization," he said, adding that mark-to-market losses in those three businesses accounted for about 90% of the $1.3 billion in the quarter.

"Trends in mortgage credit are deteriorating faster than we would have expected," the CEO said.

"This quarter was messy, with market-disruption related write-downs proving to be a major earnings headwind," wrote analysts at Oppenheimer & Co. in a research note, although they said underlying core banking trends were "very good."

"We attribute most of the miss to greater-than-expected capital-markets weakness, but a 128% sequential increase in credit costs was also an important factor, and management raised guidance for net charge-offs and provision expense," wrote analysts at FBR Capital Markets in a report to clients.

"While we expect that credit costs will be manageable and better than peers, we also expect that Wachovia will be viewed as a mortgage bank and the shares' upside will be limited until real-estate markets and nonperforming asset levels stabilize," they said.

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